Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide
American Economic Review
vol. 104,
no. 9, September 2014
(pp. 2830-57)
Abstract
We investigate whether homeowners respond strategically to news of mortgage modification programs. We exploit plausibly exogenous variation in modification policy induced by settlement of U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers. Using a difference-in-difference framework, we find that Countrywide's monthly delinquency rate increased more than 0.54 percentage points—a ten percent relative increase—immediately after the settlement's announcement. The estimated increase in default rates is largest among borrowers least likely to default otherwise. These results suggest that strategic behavior should be an important consideration in designing mortgage modification programs. (JEL D10, G21, G33, K00)Citation
Mayer, Christopher, Edward Morrison, Tomasz Piskorski, and Arpit Gupta. 2014. "Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide." American Economic Review, 104 (9): 2830-57. DOI: 10.1257/aer.104.9.2830Additional Materials
JEL Classification
- D14 Household Saving; Personal Finance
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- K22 Business and Securities Law
- R31 Housing Supply and Markets